AIG Q1 Earnings Beat Ests, Sinks Y/Y - Analyst Blog

American International Group Inc. AIG reported first-quarter 2014 operating earnings per share EPS of $1.21, which surpassed the Zacks Consensus Estimate of $1.08 but was below the year-ago quarter figure of $1.34. Subsequently, operating net income tumbled 10.1% year over year to $1.78 billion.

On a GAAP basis, including extraordinary items, AIG reported a quarterly net income of $1.61 billion or $1.09 per share, compared with $2.21 billion or $1.49 per share in the year-ago quarter.

Total revenue decreased 5% year over year to $16.11 billion and dragged earnings as well. However, total benefits, claims and expenses fell 1.8% to $13.84 billion, primarily due to lower interest expense, partially offset by higher claims expense.

Segment Details

AIG Property Casualty (P&C) – conducted through Chartis and its sub-segments: Commercial & Consumer Insurance – reported pre-tax income of $1.31 billion, declining 18.9% over the year-ago quarter. The downside was a result of lower premiums earned and net investment income coupled with higher claims, acquisition and operating expenses. Underwriting loss widened to $97 million from an income of $232 million in the year-ago quarter.

Meanwhile, investment income dipped 5.2% year over year to $1.26 billion. Net premiums written also sank 1.2% to $8.33 billion. Lower premiums were recorded across commercial insurance and consumer segments, while pre-tax catastrophe losses soared to $262 million from $41 million in the year-ago quarter. Subsequently, combined ratio deteriorated to 101.2% from 97.3% in the year-ago quarter.

Reported pre-tax income at AIG Life and Retirement (conducted through SunAmerica) edged up 1.6% year over year to $1.41 billion based on higher policy fees and other income, while premiums and investment income declined. Additionally, assets under management (AUM) rose 9% year over year to $324.4 billion as of Mar 31, 2014 driven by positive net flows.

Additionally, premiums, deposits and other considerations spiked 28% year over year to $7.13 billion. Increases in individual variable and fixed annuities as well as income on alternative investments were witnessed due to effective spread management. However, net investment income dipped 2% owing to lower yields.

Other Operations reported operating loss of $345 million versus $381 million in the year-ago period. The wider loss was primarily due to higher net realized capital losses of $321 million in the reported quarter, partially offset by lower debt expenses.

Within this, Mortgage Guaranty – conducted through United Guaranty Corporation (UGC) – recorded an operating income of $76 million, up from $41 million in the year-ago quarter, driven by decreased mortgage originations. Net premiums written declined 6% to $231 million due to deterioration of the first-lien in-force book.

In addition, AIG's Direct Investment book (DIB), comprising the Matched Investment Program (MIP) and non-derivative assets and liabilities of the previous AIG Financial Products Corp. (AIGFP) portfolios, recorded operating income of $440 million versus $329 million in the year-ago period.

Global Capital Markets, consisting of AIG Markets Inc. and the remaining AIGFP derivatives portfolio, recorded an operating income of mere $29 million, which marked a sharp decline from $227 million in the year-ago quarter.

Meanwhile, the Aircraft Leasing business recorded operating income of $17 million against $43 million in the year-ago quarter. Total aircraft leasing revenue rose 3.6% year over year to $1.11 billion.

Financial Update

At the end of Mar 2014, total investments came in at $357.5 billion, up from $356.4 billion at 2013-end. Total cash increased to $2.49 billion from $2.24 billion at 2013-end. Shareholder equity totaled $103.8 billion, up from $100.5 billion at the end of 2013, while total assets increased to $547.1 billion from $541.3 billion at 2013-end.

Meanwhile, long-term debt declined to $39.5 billion from $41.7 billion at 2013-end based on effective liability management. This also improved the total debt-to-capital ratio to 16.9% from 17.3% at 2013-end.

Additionally, in Jan 2014, AIG reduced DIB debt by $2.2 billion using cash and short-term investments garnered by it. This included redemption of $1.2 billion of 4.25% notes that were due 2014 and a repurchase of $1.0 billion of 8.25% notes due 2018.

In May 2014, the company further reduced DIB debt by redemption of $750 million worth of 3.0% notes due 2015, using cash allocated to it.

At the end of Mar 2014, AIG's book value per common share, including accumulated other comprehensive income, rose 6.5% year over year to $71.77. Moreover, operating return on equity (ROE) deteriorated to 7.5% from 9.2% in the year-ago quarter.

Capital Deployment Update

AIG bought back about 17.4 million shares for $867 million during the reported quarter. In Feb 2014, the board sanctioned another $1.0 billion of stock repurchases, to be implemented gradually. AIG had $537 million stock available for repurchases at Mar 201-end.

On May 5, 2014, the board of AIG declared its regular quarterly dividend of 12.5 cents per share, payable on Jun 24, 2014 to shareholders of record on Jun 10.

On Mar 25, 2014, AIG paid its regular quarterly dividend of 12.5 cents per share to shareholders of record as on Mar 11. This was hiked by 25% from prior payout of 10 cents a share. The company had re-initiated dividend payouts in Aug 2013.

Others

Currently, AIG carries a Zacks Rank #3 (Hold). However, some better-ranked insurers include Prudential Plc PUK, Aegon NV AEG and Old Republic International Corp. ORI, all of which sport a Zacks Rank #1 (Strong Buy).